Headline is too strong I think. This article, written by one of my favorite blogger Sramana Mitra, is apparently too high-level. Looks like some editor did a hack job to insert generalizations to make it more appealing to mainstream audience. I am surprised by lack of analysis in this particular post. This is surprising to me as I am a big fan of her strategy posts on her own blog.

I have been on both sides of outsourcing equation, enjoyed hands-on experience and know where it succeeds (or sucks!). Let me try to use my experience to counter broad generalizations made in Forbes article.

Jobs that are low value-added and easily automatable should and will disappear over the next decade.

There are jobs which appear/disappear in every economy. Definition of what constitutes “low value-added” also changes every now and then. Decade is a long time for any company to ignore stock market pressure. Labor-arbitrage element of outsourcing might see slow-down but to say that all these companies do is a low value-added task is a wide brushstroke. Market will pressure these companies to extend labor-arbitrage benefits to more structured and automated-driven labor-arbitrage designs ( Innovative tools in much-ridiculed call center industry is one example. Front end of call center is a fodder for Colbert show but back-end is seeing interesting tools and processes. )

My prediction is as more business functions get “social”, companies will need more manual processes to manage things. Take a simple example of community management. Take a combine toll of Myspace, Facebook, Digg, GetSatisfaction, Yelp, and Techmeme (and not to talk about thousands of niche community sites) on your business bottom line. How are companies going to “man” these destinations to manage their sales and marketing function. I doubt anybody can completely “automate” this task in near future. New jobs will get created here and they will require more people. That’s just one example of how each industry cycle creates new jobs.

However, the reality is that wages are rising in India. The cost advantage for offshoring to India used to be at least 1:6. Today, it is at best 1:3. Attrition is scary

Attrition is really scary. It has hurt us in the past. Cost/margin squeeze will continue just as it will continue for Google or Microsoft. It’s a business cycle phenomena. Blame Schumpeter for that. In outsourcing context, attrition problem goes beyond IT industry, it’s as much a cultural problem. Pavan Verma’s excellent book will give more clue on the attrition problem.

SaaS impact is very interesting. As Sramana mentioned in her previous post. Zoho can beat Salesforce with nearly 1/3rd cost advantage. Combining Amazon EC2/S3 infrastructure with other emerging cloud services, infrastructure part of SaaS will eventually become a commodity. Not very long ago this infrastructure building used to be high value-add activity. Very soon all these offshore companies (not just Indian but rest of the countries as well) will start leveraging SaaS architecture to move into business function. KPO is one example. Companies like GridStone, Amba Research and Zyme Solutions are good examples of next generation outsourcing models.

Attrition is going to make lure of starting outsourcing business in India less appealing. Which is a good thing as other sectors will get well deserved attention.

Yet, India, for all its glory, is still the world’s back office. India’s tech industry is a “services” industry. The Indians don’t do the thinking. The customers do. India executes.

As a result, India has not learned to invent technology products of its own. Barring a few exceptions, the huge amount of venture capital chasing India finds it difficult to be deployed. There is way too much money, way too few deals. Instead, tech-sector VCs are now diverting capital to retail, real estate, hotels and other non-tech sectors.

Broad generalization? Outside Silicon Valley and in some parts of Seattle, Boston (and Israel), world of high tech innovation is just that - world of exceptions! Venture capital business is largely risk capital and it’s still centered around cultures which promote and reward risks. Venture capital deals in India are mostly late stage business deals. One can say they are more like private equity deals. Next generation VCs will see opportunity in emerging cloud architecture economics and find new bets to place.

I am not blindly defending outsourcing industry and I think fear of “creative destruction” should be more prominent . Right now there is lot of complacency. Few months ago I had commented that outsourcing is not right for every company and not many people were happy with that article.

Outsourcing business model is long due for overhaul but to say that they are heading for a cliff is a big stretch. Reality is lot more boring and headline won’t be very attractive. I will keep checking Sramana’s blog for detailed analysis on same topics.